As we know, on March 27, 2020, the CARES Act, the largest stimulus package in US history, was signed. The most favorable provision in the Act, the Paycheck Protection Program (PPP) received additional funding of $310 billion on April 24, 2020, after the initial $349 billion PPP funding was depleted. The intent of the PPP was to help US companies retain US employees during the immediate crisis of COVID-19. While the PPP application, approval, and funding process have been challenging for everyone, foreign-owned subsidiaries based in the U.S. with U.S. employees continue to face additional challenges that their domestic counterparts did not encounter. Therefore, while it is important for all companies to have a “Plan B” in place beyond the PPP and other stimulus lending options, it is critical for companies with foreign direct investment (FDI) in the U.S.
What are the hurdles for foreign U.S. companies?
- Paycheck Protection Program (PPP): The PPP loan is a type of loan from the Small Business Administration (SBA) and is administered through participating lenders such as banks and credit unions. An SBA loan application typically requires a tax identification and an address from the owner, and signer of the U.S. company applying for the loan, but the SBA systems are formatted only for U.S. social security numbers (SSN), an employer identification numbers (EIN), and a US address. Foreign owned U.S. companies often have corporate officers outside of the U.S. with no SSN or U.S. address, and typically a foreign owner does not have an EIN or U.S. address; therefore, it has been difficult to execute a PPP application without the required U.S. information. Historically, SBA loans have not been used by foreign-owned companies because of personal guarantee, U.S. collateral or other additional eligibility requirements the SBA may require. Therefore, neither the banks nor the SBA had the necessary experience or sufficient time to assist foreign-owned companies in navigating these obstacles for processing the PPP application. Banks were still accepting applications for the second round of PPP funding, but many foreign-owned companies operating in the U.S. and employing U.S. workers may not be able to complete their PPP application at all or in time to receive approval before the funding again runs out.
- Other Relief/SBA loans: There are a number of other favorable loans available to help U.S. companies during this crisis; however, many are SBA loans which will have the same and/or additional hurdles for a foreign-owned company to clear.
- Main Street Lending Program: This program offers options for mid-market to upper-market companies who may not qualify for PPP and includes a minimum loan ask of $1M. Borrowers interested in these types of loans would apply through their bank, so many companies considering this option tend to be domestic middle-market clients with established lending relationships rather than foreign-owned companies in early-stage or initial growth phases of operation.
But there are ways, a.k.a. ‘Plan B,’ which foreign-owned US companies can utilize advantages offered by the CARES Act package and other stimulus relief:
1.) Employer Payroll Tax Deferral
A company may defer the deposit and payment of the 6.2% employer social security tax through December 31, 2020, and repay 50% on December 31, 2021, and 50% on December 31, 2022. Recent guidance has clarified that a company can utilize this tax deferral provision until they are notified by the lender of forgiveness of the PPP loan. Therefore, even if a business is still pursuing, or has been approved for a PPP loan, it can defer payroll tax now to ease the cash flow burden of its existing payroll. Contact your payroll company to take advantage of this deferral with your next payroll.
2.) Employee Retention Credit
If the business has decided not to pursue a PPP loan, a payroll tax credit of 50% of up to $10,000 of wages per employee is available if the company meets eligibility criteria. An eligible employer is one which was carrying on a trade or business during the calendar year 2020 and meets one of the following:
- Operations of the business are fully or partially suspended during any calendar quarter in 2020 due to orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19 OR
- Experiences a significant decline in gross receipts which begins with the first quarter in 2020 in which gross receipts are 50% less than gross receipts from the same quarter of the prior year. Following the start, a significant decline ends in the first quarter in 2020 in which gross receipts are more than 80% of gross receipts from the same quarter of the prior year.
The Employee Retention Credit is in effect for wages paid between 3/13/20 and 12/31/20. Contact your payroll company to take advantage of this credit if you are eligible.
3.) Expanded Unemployment Benefits
The CARES Act includes expanded federal unemployment benefits, in addition to the existing state unemployment benefits, to support employees who lose their jobs either temporarily or permanently during this crisis. If a business needs to make this difficult choice with its workforce, more information about Michigan employer responsibility is available.
4.) Expanded Emergency Sick Leave and FMLA
The Families First Coronavirus Response Act (FFCRA) provides expanded leave to employees impacted by COVID-19. It also includes a payroll tax credit for employers to help offset some of the cost of the expanded leave. Clayton & McKervey offers more information.
5.) Corporate Loss Provisions
The CARES Act temporarily lifts the limitation enacted by the 2017 Tax Cuts and Jobs Act on the use of losses generated from corporate income tax returns, allowing for full utilization of losses incurred before 2021 to offset taxable income in future years. Also, corporate losses incurred in 2018, 2019, and 2020 can now be carried back five years, providing an opportunity to claim refunds for taxes paid in prior years and increase cash flow. The five year loss carryback period may allow for a refund of taxes paid at the higher corporate tax rate of 35%.
The excess loss limitation has been repealed for 2018, 2019, and 2020; a taxpayer with a previous limitation of losses on their 2018 or 2019 tax return may amend the returns to claim a refund of taxes.
6.) Considerations beyond Stimulus Provisions:
Companies should identify a strategy beyond the immediate crisis. Consider what to do, what to prioritize, and how to get ready for what’s next beyond the current “stay at home” order and for the “new normal.” Cash flow projections, budgeting, and modeling can help businesses understand and adjust to best/worst case scenarios. In the new environment of uncertainty, a company may need to augment their current cash flow management tools and should consider using a 13 Week Cash Flow template. The COVID-19 disruption may also present opportunities to consider strategies including vetting acquisition targets or determine selling strategies.
Data is expected to play an even bigger role in running a business now, especially ones with a global footprint. Data from new and multiple sources will be needed to make and monitor strategic decisions in operational and administrative areas of a business including changes in logistics, supply chain diversification, real estate footprint, and remote workforce culture, to name a few. Traditional financial data will need to be available faster and with greater clarity and dimension to manage a changing global economy.
Finally, companies that are part of a global group must move forward from separately addressing the immediate crisis in each geographic area of their business and establish a global strategy. Working together with the leadership in each country or region of the business should be augmented by collaboration with the accounting, tax and legal advisors in each country. International tax requirements and planning opportunities may shift for businesses doing business globally. Transfer pricing on intercompany transactions may need to be revisited in anticipation of changes in global tax rates post-crisis.
Clayton & McKervey can help expand or refine your global service approach to thrive in the post-pandemic world. Contact us to discuss changes in the data and information needed to move forward strategically, transactional opportunities available now, and how to tap into tax and accounting benefits as a result of updates in the law.
The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.